This lecture notes is about Initial Public Offerings. The notes includes advantages and disadvantages of IPO, why would company choose to do IPO, and the process of IPOs. It also discuss the Anomalies in IPO, for example short-run underprice, Long-run Underperformance and Hot Issue Market Phenomeno...
Test Bank for Corporate Finance, 5th Edition by Jonathan Berk, DeMarzo Chapter 1-31 A++
UPDATED Finance 1 for Business Summary
Test Bank For Corporate Finance The Core, 5th Edition by Jonathan Berk, Peter DeMarzo Chapter 1-19
Tout pour ce livre (74)
École, étude et sujet
The University of Manchester (UOM)
Inconnu
BMAN30111 Advanced Corporate Finance
Tous les documents sur ce sujet (4)
Vendeur
S'abonner
phyllisho
Aperçu du contenu
Capital Financing
Advantages vs Disadvantages
Advantages
1. Cash to make investment
2. Strength Equity Base —- Reduce leverage
3. More liquidity than selling to one institution
4. More information, understanding to the company (reports…)
5. Better reputation
6. Act as exit strategy for VCs
7. Diversifying risk of original owners (tolerate higher profit variability)
Disadvantages
1. Financial costs
- Expensive
- Underpricing stocks
- Increase legal requirements (reports, financial statements, etc)
2. Stock-price emphasis
- Short-term orientated for management, not friendly to long-term investment
projects
- Separate ownership and control (lost of control for founder)
- Hostile take-over risk (Eg. Hermes)
3. Being watched
- More attention and pressure from public towards management
- More disclosure to product market competitors (unfriendly to tech company)
Reasons for IPOs
For all countries, main reasons is financing —
Main differences between US and Europe: Europe care more about reputation and American
care more about costs in IPOs
Process of IPOs
1. Underwrite
- Two kinds of underwriters: Lead underwriter (one underwrite) and Syndicate
(a group of underwriter)
- Two kinds of offering
i) Best-efforts: investment bank try the best to sell to public and buy
the rest of stock unsold
, ii) Firm-commitment: underwrite the issue. Investment banks buy
everything sponsor price and resell to the public in offer price
But underwriters receives compensation spread:
Spread = offer price - sponsor offer
2. Valuation of the company
3. Road show: senior management and its underwriters travel around to promote the
company and explain the rationale for the offer price
4. Alternative underwriting practices:
i) Book building: Through communication with investors, underwriters tries to
measure demand curves and decide the offer price based on it
ii) Fixed-price offering (Offer for sale): underwrites set price for final offer in
advance, and offer share by inviting subscriptions from retail and institutional
investors
iii) Placing: target institutional investors, it’s not normal underwritten
iv) Auction 拍卖
Anomalies in IPO
a) Short-Run Underprice
● Post IPOs, ‘short run’ is taken as the first day/week/month of trading
Offer price for stock ‘i’ is Pi0
● Price at the first trading day Pi1
Ri1 = (P1-P0)/ P0 greater than 0 (increase in stock price)
● Market adjusted measure are used to quantify the abnormal return at the end
of trading day (Market adjusted abnormal return = MAARi1)
Actual return = Ri1 = (P1-P0)/P0
Abnormal return = Expected return - Actual return
( 1+ Ri 1)
MAARiq = 100 x [ −1 ]
(1+ Rm 1)
● Shares are offered at a price much lower than trading price on the first
day of listing
● Eg. VA Linux Systems 1999: offer price $ 30, by the end of the day $ 239
Theories for why is it underpriced
1) Risk- averse underwriter (Hypothesis)
- Underwriters underprice to reduce risk of unsuccessful
IPO (most IPOs are firm-commitment offers)
- So firm-commitment IPOs are more underpriced than
Best-effort ones
2) The Winner’s Curse (Hypothesis)
- Fixed amount of share issued, so ration starts when
there’s excessive demand
- 2 kinds of investors: perfectly formed and completely
informed
Les avantages d'acheter des résumés chez Stuvia:
Qualité garantie par les avis des clients
Les clients de Stuvia ont évalués plus de 700 000 résumés. C'est comme ça que vous savez que vous achetez les meilleurs documents.
L’achat facile et rapide
Vous pouvez payer rapidement avec iDeal, carte de crédit ou Stuvia-crédit pour les résumés. Il n'y a pas d'adhésion nécessaire.
Focus sur l’essentiel
Vos camarades écrivent eux-mêmes les notes d’étude, c’est pourquoi les documents sont toujours fiables et à jour. Cela garantit que vous arrivez rapidement au coeur du matériel.
Foire aux questions
Qu'est-ce que j'obtiens en achetant ce document ?
Vous obtenez un PDF, disponible immédiatement après votre achat. Le document acheté est accessible à tout moment, n'importe où et indéfiniment via votre profil.
Garantie de remboursement : comment ça marche ?
Notre garantie de satisfaction garantit que vous trouverez toujours un document d'étude qui vous convient. Vous remplissez un formulaire et notre équipe du service client s'occupe du reste.
Auprès de qui est-ce que j'achète ce résumé ?
Stuvia est une place de marché. Alors, vous n'achetez donc pas ce document chez nous, mais auprès du vendeur phyllisho. Stuvia facilite les paiements au vendeur.
Est-ce que j'aurai un abonnement?
Non, vous n'achetez ce résumé que pour 6,19 €. Vous n'êtes lié à rien après votre achat.
